The buyer is proposing a significant earnout based on future EBITDA targets, but we are terrified they will starve our sales pipeline or reallocate our key developers to other portfolio companies. How do we structure post-closing operational covenants and resource-allocation guarantees to protect our earnout payout?

Question

Tyler Smith · Accepted Answer

An earnout is often a mechanism used to bridge a valuation gap, but it can easily become a trap if the buyer starves your division of the resources needed to hit your targets. To protect your earnout, you must negotiate strict operational covenants in the purchase agreement. First, secure a covenant that requires the buyer to support your division with a minimum level of working capital, marketing spend, and headcount. This prevents them from cutting your budget to boost their short-term parent-company profits at the expense of your earnout metrics. Second, include a non-interference clause. This clause must state that the buyer cannot reallocate your key employees, developers, or sales staff to other portfolio companies without your written consent, nor can they alter your core service offerings. Third, ensure the agreement specifies that your division will be run in accordance with past business practices, meaning you retain control over daily operations and hiring. You should also build in an acceleration clause. This clause states that if the buyer breaches any of these operational covenants, defaults on payment, or terminates your key leadership team members without cause, the entire earnout immediately becomes due and payable at the maximum target level. By tying their operational behavior to immediate financial penalties, you maintain the leverage needed to run your business effectively and secure your hard-earned payout.